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1. Using the midpoint formula, calculate elasticity for each of the following changes in demand by a household.

P1 P2 Q1 Q2
Demand for:

Long-distance
telephone service 0.25 per min 0.15 per min 300min per mo. 400 min per mo.

Orange juice 1.49 per qt. 1.89 per qt 14 at per mo. 12 qt per mo

Big Macs 2.89 1.00 3 per week 6 per week

Cooked shrimp 9.00 per lb 12.00 per lb 2 2lb per mo 1.5lb per mo

2. Taxicab fares in most cities are regulated. Several years ago, taxi-cab drives in Boston obtained permission to raise their fares 10 percent, and they anticipated that revenues would increase by about 10 percent as a result. They were disappointed, however. When the commissioner granted the 10 percent increase, revenues increased by only about 5 percent. What can you infer about the elasticity of demand for taxicab rides? What were taxicab drives assuming about the elasticity of demand?

3. Assume that Mei has $100 per month to divide between dinners at a Chinese restaurant and nights at Zanzibar, a local pub. Assume that going to Zanzibar costs $20 and eating at the Chinese restaurant costs $10. Suppose that Mei spends two nights at Zanzibar and eats six times at the Chinese restaurant.
a. Draw Mei's budget constraint and show that she can afford six dinners and two nights at Zanzibar.
b. Assume that Mei comes into some money and can now spend $200 per month. Draw her new budget constraint.
c. As a result of the increase in income, Mei decides to spend eight nights at Zanzibar and eat at the Chinese restaurant four times. What kind of a good is Chinese food? What kind of a good is a night at Zanzibar?
d. What part of the increase in Zanzibar trips is due to the income effect, and which part is due to the substitution effect? Explain your answer.

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Using the midpoint formula, calculate elasticity for each of the following changes in demand by a household.

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1. Using the midpoint formula, calculate elasticity for each of the following changes in demand by a household.
P1 P2 Q1 Q2 Elasticity
Demand for:
Long-distance telephone service
0.25 0.15 300 400 -0.89286
Orange juice 1.49 1.89 14 12 -0.01422
Big Macs 2.89 1 3 6 -0.01133
Cooked shrimp 9 12 2.2 1.5 -0.00075

2. Taxicab fares in most cities are regulated. Several years ago, taxi-cab drives in Boston obtained permission to raise their fares 10 percent, and they anticipated that revenues would increase by about 10 percent as a result. They were disappointed, however. When the commissioner granted the 10 percent increase, revenues increased by only about 5 percent. What can you infer ...

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